Summary

The largest change to the income tax in thirty years, the Tax Cuts and Jobs Act (TCJA) is now part way through its first year. It’s overall impact on the economy is yet to be determined but as we approach year end, many will be focused on the impact on charitable giving and on the charities that benefit from America’s philanthropic largesse. Historically America is generous like no other nation, with giving recorded at $410.02 billion in 2017. Historically, America also gives most heavily in the last quarter. It’s estimated that as much as 80% of gifts arrive specifically in November and December. How will the TCJA impact year end giving and what should donors do to adapt to the changes and how should charities communicate with their donors to keep giving levels in tact? A few insights and options should prove helpful.

The major concern about TCJA for many has been the change to the personal exemption to $12,000 per individual and $24,000 for a married couple. Coupled with the S.A.L.T. limits that effectively removes the deduction for state and local income taxes and eliminates the ability for most taxpayers to itemize their deductions. No itemization means that most charitable gifts will no longer be income tax deductible for most taxpayers. And, while arguments rage over whether or not people give to save taxes (they don’t), I’ve never seen a taxpayer who doesn’t appreciate the tax savings that come with giving. And while non-itemizers may continue to give at the same rate, what will happen to those gifts that are attributed to those who have always been able to use the deduction and now can’t for the very first time? What can advisors and charities do to help them continue their generosity under the new law?

Three solutions present themselves that will allow donors to continue giving at the same levels, albeit using slightly different methods:

First, “bunch” deductions by making four or five years of gifts in one year. Normally a gift of $10,000 would not allow a married taxpayer to deduct the gift under the current law. Instead, give $50,000, perhaps to a donor advised fund (DAF) and use it to distribute the funds over the next five years. Same money, same amount of giving, just timed differently. In order to enhance this gift, transfer low basis, appreciated assets such as publicly traded stock to accomplish this. Since state income taxes are no longer income tax deductible, the effect of state tax on the capital gains rate has essentially raised the cost of selling appreciated assets. Giving them to charity with no tax makes more sense than ever.

Second, instead of a DAF, set up a non-grantor irrevocable trust for your gifts. This requires a little more innovative thinking but it also allows for a fair amount of flexibility. With this strategy, donors transfer assets to a non-grantor trust. They make a gift to the trust, utilizing some of their lifetime exemption amount (now $11.18 Million) to do so. Since the trust is “non-grantor”, it is its own taxpayer. Each year as the trust earns income, it can distribute that income to charity at the direction of the trustee of the trust. The distribution is tax deductible to the trust, without limitation. Essentially, the donors have not only removed the (taxable) income created by the asset from their income tax return, but the trust has an unlimited charitable income tax deduction. Further, the donors have removed this asset from their estate, if that’s an issue. Call this “super bunching” if you like.

Third, is the use of almost any of the common planned gifts has now become more and more appealing. Pooled Income Funds, Charitable Remainder Trusts, Charitable Lead Trusts, Charitable Gift Annuities and other gifts can all create large charitable income tax deduction ad still leave the donor with either an income interest or a reversionary interest in the gift assets. While these gifts may be complex, theyare also quite powerful each in its own way.

Waiting until the end of the year to make gifts has been the norm. Perhaps the new law will help change that. It makes donors and advisors think more and plan more. There are many opportunities that should keep giving as part of our cultural imperative. We may just have to give more thoughtfully and a little earlier

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Comments

I have carefully explained to my donors and my congregation that they have just received at least three blessings from the new tax law:
1. Your tax rate went down from 15% to 12%, or 25% to 22%, or 28% to 24%, etc.
2. Your standard deduction went up.
3. Effectively the government is making it as easy to give generously as before, but you can simplify by taking the standard deduction.
4. And for the many donors over age 70.5, the Qualified Charitable Distribution is a further blessing!

Of course for the really wealthy the limits of the tax brackets increased, the tax rate dropped, the Pease limitations are gone, and they got a $4,400,000 tax break on federal estate taxes!

Summary: most everyone (families with many children one notable exception) can afford to give generously.